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Paul Allen Loosens His Grip

Charter Communications chairman Paul Allen's voting grip on the St. Louis-based MSO will be loosened considerably once the troubled company files for bankruptcy protection, according to documents filed with the Securities and Exchange Commission last week.

Allen, who has reportedly invested more than $7 billion of his own money in Charter since 1998, currently owns 52% of the cable operator's equity and 91% of its voting shares, according to its last proxy statement filed in March. And while it was largely expected that his controlling interest in the company would be reduced after it completes a planned debt-for-equity swap, the company had stressed that he would retain the largest voting interest in the company.

According to the SEC documents, Allen's voting interest will fall to 35%, although the chairman will be able to elect the same percentage of the company's board of directors. Charter's board will be limited to 11 members — it has nine members now. In addition, the restructuring agreement allows each holder of 10% or more of the company's voting power to nominate one member to the board for each 10% of voting power, according to the SEC filing.

Allen's equity position in the company will be a bit trickier. According to the document, Allen's current 52% equity stake will be wiped out after the bankruptcy — along with everyone else's — and be replaced with new stock.

The SEC documents indicated that Allen and entities he controls will receive about 2% of Charter's new Class-B super-voting shares and warrants for up to 4% of Charter's new Class-A common equity. In addition, Allen will receive $175 million in cash, $85 million in Charter debt and $20 million in reimbursement for restructuring fees.

Charter was also able to raise about $3 billion in new capital through the deal in the form of new equity. Although few specifics were available, a person familiar with the negotiations said that the equity was valued at a premium comparable to Charter's cable peers like Comcast and Time Warner Cable.

According to the person familiar with the negotiations, the new equity will be spilt among a large number of bondholders, including Apollo Management, Oaktree Capital Management, Crestview Partners, Fidelity and Franklin Resources. But no one bondholder will emerge with an overly dominant equity position, the person familiar with the negotiations said.

That includes Allen, who unlike in the past will need at least one ally among the voting shareowners to push through any agenda.

According to people familiar with the deal, Charter is likely to emerge from Chapter 11 bankruptcy protection within 90 to 120 days after filing. And with a newly scrubbed balance sheet and a public equity that more closely reflects the value of its assets, the company could become an acquisition target in the future.

“There could be a strategic event,” said the person familiar with the negotiations. “I don't think that is being contemplated today, but at some point it would be logical. The problem with Charter has never been its operational performance; it's all been about the capital structure.”

Charter's creditors were advised in the deal by UBS; Paul, Weiss, Rifkind, Wharton & Garrison LLP; and Houlihan, Lokey, Howard & Zukin.

Holding On, Before and After
Charter chairman Paul Allen will have to give up some control when the company emerges from bankruptcy sometime later this year. A snapshot of Allen's holdings in the company as of Jan. 31, 2008, and what's likely after the restructuring is completed: